Chapter 7
Unemployment and Inflation
Unemployment
 What is the lost to the us- personally and for the
economy when unemployment happens?
 Personally:
 Stead...
What does the unemployment rate
measure?
 The unemployment rate measures the healthiness of a
specific economy.
Measuring Unemployment
 Civilian non-institutional adult population: all civilian
(meaning excluding the military) age 16...
Measuring Unemployment
Measuring Unemployment
 Under-employed: individuals who are working part-time
but would prefer full-time status.
 These ...
Exhibit 1

LO1

The Adult Population Sums the Employed,
the Unemployed, and Those Not in the
Labor Force: February 2009 (i...
Labor Force Participation Rate
 This measures the total number of people in a nation
that are ACTIVELY participating in t...
LO1

Exhibit 2
The U.S. Unemployment Rate Since 1900
Unemployment among Various
Groups
 Unemployment in various groups:






Age: Higher unemployment among teenagers
Ra...
LO1

Exhibit 3(a)
Unemployment Rates for Various Groups
LO1

Exhibit 3(b)
Unemployment Rates for Various Groups
Unemployment varies across
occupations and regions
 Varies by occupations
 Blue-collar workers- higher unemployment that...
Unemployment Rates Differ Across
U.S. Metropolitan Areas

Exhibit 4

LO1
Sources of Unemployment
 Frictional Unemployment: occurs when job seekers and
employers are not matched up.
 The employe...
Sources of Unemployment
 Structural Unemployment: occurs when the skills
demanded by employers do not match those of the
...
Duration of Unemployment
 Long-term unemployed: Those who have been out of
work for 27 weeks or longer
What is full employment?
 What is full employment so important?
 It measures the health of the economy
 This happens wh...
Unemployment Compensation
 Cash transfers to those who lose their jobs and actively
seek employment
 Benefits can last u...
LO1

Exhibit 5

During the Last Quarter Century, the U.S.
Unemployment Rate Fell, Europe’s Remained
High, and Japan’s Rose
Problems with official unemployment
figures
 Under-employment: the problem of individuals working a
part-time job when th...
Inflation
 What is inflation?
 This is when the average price level increases for all goods
 This has been a current co...
Duck Tales explains Inflation
Hyperinflation
 Hyperinflation: A very high rate of inflation. VERY
DANGEROUS!!!
 In 1923 Germany faced this, please rea...
Germany explains hyperinflation
Two Sources of Inflation
 Demand-pull inflation: a sustained rise in the price level
caused by a rightward shift of the a...
Two Sources of Inflation
 Cost-push inflation: a sustained rise in the price level
caused by a leftward shift of the aggr...
LO2

Exhibit 6

Inflation Caused by Shifts of Aggregate Demand
and Aggregate Supply Curves
(a) Demand-pull inflation: infl...
A little history on inflation and the
price level
 Since 1913, steady increase in price levels
 Before 1950s
 High infl...
Exhibit 7(a)

LO2

Consumer Price Index Since 1913
LO2

Exhibit 7(b)
Inflation Since 1913
Anticipated Versus Unanticipated
Inflation
 Unanticipated will create more problems that anticipated
inflation
 Example:...
Average Annual Inflation from 2004
to 2008 Differed across U.S.
Metropolitan Areas

Exhibit 8

LO2
Inflation and Interest Rates
 What is interest?
 The dollar amount paid by borrowers to lenders

 Interest Rate: the am...
Inflation and Interest Rates
 Real interest rate: the nominal rate minute the inflation
rate
 Real interest rate= Nomina...
Exhibit 10

LO2

The Market for Loanable Funds

Nominal interest rate

S

i
D
0

Loanable funds per period

The upward slo...
Why are we scared of inflation?
 The presence of inflation means EVERYTHING cost
more, so the price of goods goes up
 Wh...
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Chapter 7-Macro

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Chapter 7-Macro

  1. 1. Chapter 7 Unemployment and Inflation
  2. 2. Unemployment  What is the lost to the us- personally and for the economy when unemployment happens?  Personally:  Steady Paycheck to consumers  Social loss: low self-esteem and lost of identity  To the economy:  Lost output due to decreased disposal income in the economy
  3. 3. What does the unemployment rate measure?  The unemployment rate measures the healthiness of a specific economy.
  4. 4. Measuring Unemployment  Civilian non-institutional adult population: all civilian (meaning excluding the military) age 16 or older, except those in prison, mental facilities or in homes for the aged.  Labor Force: people in the adult population who are either working or looking for work  People looking for a job, but cannot find one are unemployed  Not in the work force:  Stay at home moms  College students not looking for work  Retired workers
  5. 5. Measuring Unemployment
  6. 6. Measuring Unemployment  Under-employed: individuals who are working part-time but would prefer full-time status.  These individuals are counted in the employed rate, making the unemployment rate seem better than it actually is.  Where are we now: http://data.bls.gov/timeseries/LNS14000000
  7. 7. Exhibit 1 LO1 The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor Force: February 2009 (in millions) Unemployed (12.5) LABOR FORCE (154.2) Employed (141.7) NOT WORKING (93.2) Not in labor force (80.7)
  8. 8. Labor Force Participation Rate  This measures the total number of people in a nation that are ACTIVELY participating in the labor force, i.e. they are working a part-time or full-time job.  Increase in women participates from 34% of adult women in 1950 to 60% of adult women today
  9. 9. LO1 Exhibit 2 The U.S. Unemployment Rate Since 1900
  10. 10. Unemployment among Various Groups  Unemployment in various groups:      Age: Higher unemployment among teenagers Race Gender Geography Occupation
  11. 11. LO1 Exhibit 3(a) Unemployment Rates for Various Groups
  12. 12. LO1 Exhibit 3(b) Unemployment Rates for Various Groups
  13. 13. Unemployment varies across occupations and regions  Varies by occupations  Blue-collar workers- higher unemployment that professional and technical workers  Varies by regions  Specific regions have higher unemployment rates
  14. 14. Unemployment Rates Differ Across U.S. Metropolitan Areas Exhibit 4 LO1
  15. 15. Sources of Unemployment  Frictional Unemployment: occurs when job seekers and employers are not matched up.  The employer cannot find a qualified candidate  The job seeker is unable to find a match for his/her background  Seasonal Unemployment: occurs during seasonal changes throughout the year  Landscapers  Snow Plowers  Amusement park operators
  16. 16. Sources of Unemployment  Structural Unemployment: occurs when the skills demanded by employers do not match those of the unemployed or the unemployed do not live where the jobs are  Financial Analyst looking in a small town  Cyclical Unemployment: occurs with fluctuations to the business cycle, increase during recessions and decrease during booms  When cyclical unemployment is present, then the economy is inside it’s PPF  The government will begin to make economic policy to increase Aggregate Demand
  17. 17. Duration of Unemployment  Long-term unemployed: Those who have been out of work for 27 weeks or longer
  18. 18. What is full employment?  What is full employment so important?  It measures the health of the economy  This happens when cyclical unemployment is zero  This does not mean zero unemployment, but low unemployment between 4 to 6 %
  19. 19. Unemployment Compensation  Cash transfers to those who lose their jobs and actively seek employment  Benefits can last up to 6 months, during recessions sometimes longer  Opportunity cost of unemployment benefits:  They may reduce the incentive for some individuals to find work
  20. 20. LO1 Exhibit 5 During the Last Quarter Century, the U.S. Unemployment Rate Fell, Europe’s Remained High, and Japan’s Rose
  21. 21. Problems with official unemployment figures  Under-employment: the problem of individuals working a part-time job when they actually want a full-time job  This is not measured in the unemployment rate  Example: M.S. in Economics working at a p-t bank teller  Some people may be pretending to look for jobs  Underground economy  Selling baked goods to friend  Selling illegal drugs  Doing the books for a friend
  22. 22. Inflation  What is inflation?  This is when the average price level increases for all goods  This has been a current concern due to the aggressive monetary policy done by Ben Bernanke during the last few years
  23. 23. Duck Tales explains Inflation
  24. 24. Hyperinflation  Hyperinflation: A very high rate of inflation. VERY DANGEROUS!!!  In 1923 Germany faced this, please read the article on Germany and watch this short youtube video
  25. 25. Germany explains hyperinflation
  26. 26. Two Sources of Inflation  Demand-pull inflation: a sustained rise in the price level caused by a rightward shift of the aggregate demand curve.  Increase in consumers purchasing ALL consumer items on the average  This has not been a concern in the last few years because consumers have not been consuming items due to the uncertainty in the economy.
  27. 27. Two Sources of Inflation  Cost-push inflation: a sustained rise in the price level caused by a leftward shift of the aggregate supply curve.  Also know as stagflation  A little look at inflation:
  28. 28. LO2 Exhibit 6 Inflation Caused by Shifts of Aggregate Demand and Aggregate Supply Curves (a) Demand-pull inflation: inflation caused by an increase of aggregate demand Price level AS (b) Cost-push inflation: inflation caused by a decrease of aggregate supply Price level AD’ P AD AD 0 AS P’ P’ P AS’ Aggregate output An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’. 0 Aggregate output A decrease of aggregate supply to AS’ “pushes” the price level up from P to P’.
  29. 29. A little history on inflation and the price level  Since 1913, steady increase in price levels  Before 1950s  High inflation that was war related, then in 1930s deflation occurred  Since 1950s  Inflation around 3.8% per year
  30. 30. Exhibit 7(a) LO2 Consumer Price Index Since 1913
  31. 31. LO2 Exhibit 7(b) Inflation Since 1913
  32. 32. Anticipated Versus Unanticipated Inflation  Unanticipated will create more problems that anticipated inflation  Example: Expected inflation of 3%, so lenders (such as banks) will plan for this. However, if inflation increases to 5%, then the lender will lose out, but the borrower will win!  Problems:  Real wages decrease- the dollar has less value  Real interest rates decrease- lenders lose money  Result:  Overall lose to the economy
  33. 33. Average Annual Inflation from 2004 to 2008 Differed across U.S. Metropolitan Areas Exhibit 8 LO2
  34. 34. Inflation and Interest Rates  What is interest?  The dollar amount paid by borrowers to lenders  Interest Rate: the amount paid per year as percentage of the amount borrowed.  The lower this rate, the cheaper it is to borrow or invest in the economy  Nominal Interest Rate: the interest rate expressed in dollars of value as a percentage of the amount loaned (it is not adjusted for inflation)
  35. 35. Inflation and Interest Rates  Real interest rate: the nominal rate minute the inflation rate  Real interest rate= Nominal interest rate – inflation rate  What happens if expected inflation is high?  The nominal interest rate will increase because lenders want to get them money back with INTEREST!!
  36. 36. Exhibit 10 LO2 The Market for Loanable Funds Nominal interest rate S i D 0 Loanable funds per period The upward sloping supply curve, S, shows that more loanable funds are supplied at higher interest rates. The downward-sloping demand curve, D, shows that the quantity of loanable funds demanded is greater at lower interest rates. The two curves intersect to determine the market interest rate, i.
  37. 37. Why are we scared of inflation?  The presence of inflation means EVERYTHING cost more, so the price of goods goes up  What does this mean?  It is hard for firms to hire as much  It makes it hard for consumers to buy as much!!!  Why do we care?  These two things decrease economic growth!!!

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